Analyst: Auto production set for first decline since 2009, but drop should be temporary

In 2017, auto production is expected to decline in North America for the first time since the financial crisis. However, the decline is expected to be temporary as automakers deal with high inventory levels.(Photo: Michael Clevenger, Louisville Courier Journal)

North American auto production will be squeezed this year for the first time since 2009 when the financial crisis took hold, but it's not a sign of an unhealthy economy or a distressed auto industry, according to a prominent analyst.

That decline, from 17.8 million vehicles to 17.3 million vehicles, is expected to be short-lived, with production bumping up the following year and notching increases for the next several years, according to Joe Langley, associate director of North America Forecasting for IHS Markit.

That decline reflects high levels of inventory and automakers' efforts to adjust production to more closely mirror demand, which remains high, rather than a worsening auto sector.

At a seasonally adjusted annual rate of more than 16 million, auto sales remain historically strong in the U.S. even as they have plateaued or dropped this year. In addition, a growing economy and a driving population expected to hit 280 million by 2025 means many fundamentals remain strong, Langley said.

“If anything, ‘why aren’t vehicle sales even higher?’ should be the question vs. looking for the next decline,” Langley said today during a discussion between analysts and reporters at IHS’ offices in Southfield.

Part of the issue for the industry currently is inventory levels. At 3.8 million units, the industry is near a 13-year high, Langley said, noting that he believes there are as many as 600,000 excess units sitting on dealer lots and elsewhere.

Some companies, namely Ford, have a done a better job of managing the excess inventory, Langley said, noting the Dearborn automaker’s willingness to shift production to meet demand.

One other aspect to note, Langley said, about the current production environment is a change in who is producing the most vehicles in North America. Beginning this year and continuing into the foreseeable future, the Detroit Three will produce fewer vehicles in North America – 8.6 million compared to 8.7 million — than other automakers, a result of factors such as offshoring and shrinking U.S. demand, which has dropped after hitting a record 17.5 million in sales last year.

Despite the length of the ongoing economy recovery, analysts at today's discussion pointed toward "policy shocks," such as a potential trade war if it were to happen, rather than economic factors as issues that could lead toward recession.

Henner Lehne, senior director of global vehicle forecasting for IHS Markit, also predicted a mild boost to the industry from Hurricane Harvey, which could continue into 2019 as affected vehicle owners work through a sometimes lengthy insurance recovery process. He said it's too early to determine whether something similar will happen with Hurricane Irma.